Limited liability for corporate torts

• Applicant: Privatdozent Dr. Chris Thomale
• Subject Area: Private Law
• Term: from 2015 to 2019
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 278732151

The research proposal -Limited liability for corporate torts- concerns the very core element of corporate law: the institution of limited liability. This concept refers to a liability architecture, according to which, notwithstanding the corporation itself as a legal entity being liable with all its assets, shareholders personal assets are exempt from liability for corporate debts. Such a liability architecture is widely recognized at corporate laws being known to virtually every legal system. The project aims at providing a fundamental analysis of limited liability, focusing on involuntary creditors, i.e. creditors that did not deliberately select the corporation as their debtor. In German statutes, such tort creditors are called holders of -claims resulting from illicit acts- (orig.: Forderungen aus unerlaubten Handlungen). It shall be investigated both from a legal realist and economic point of view to what extent limited liability can be upheld against involuntary creditors. Limited liability has been subject to the long-standing criticism that it creates externalities, shifting liability risks from corporate shareholders to corporate creditors. This problem becomes most pressing in the case of involuntary creditors upon whom the limited liability corporate debtor is effectively imposed without there being room in order to hedge or mitigate the incumbent insolvency risk. Hence, prima facie, inefficient and socially harmful behaviour is incentivised, the economic link between gain and risk is being severed and the functioning of tort law is jeopardised. The project envisages to follow up on the economic criticism just outlined in two ways: First, theoretical knowledge of limited liability shall be deepened, while, second, the results of economic analysis shall be translated into legal terms and taxonomies. Theoretical investigations will provide a qualitative and quantitative cost-benefit-analysis of limited liability, using inter alia statistics and behavioural economics. As a legal hypothesis, unlimited liability pro rata for corporate torts shall be posed and linked with existing law and doctrine. Using this two-fold approach, hopefully, our understanding of limited liability and claims resulting from illicit acts as well as their interaction and rationales will grow considerably. Plus, the new liability scheme pursued in this project will offer a tool in order to implement and strengthen public international legal principles of corporate social responsibility.

• DFG Programme: Research Grants